First time investor, looking for advice

[Rajat Bhadauria]

Hi Everyone,

I am looking to invest in a commercial property for the first time and need some advice from all the pros here. It's a 7-unit shopping plaza, all units are rented to local/ neighborhood businesses. With current rents and purchase price, it has a cap rate of 8%.

CURRENT TENANT SITUATION:

- Main tenants have been at the same location for 5-10 years.

- These are the tenants who are paying 85% of the rent, and occupying all bigger units.

- All the leases for main tenants are signed till 2030 and also specify the rent they will be paying until 2030, without any clause for rent increment. So, same rent for the next 7 years

- None of the leases are notarized. The seller's agent says that since they are not notarized, legally they are considered month to month and gives me an opportunity to make changes in rent or tenant

QUESTION: 

Considering the above conditions, how do I increase the valuation of this property? I was thinking of the following two options, but not sure if this is doable or not.

1. Increase the rent - As leases are not notarized, legally I should be able to increase the rent. But my agent says, in this case, if the tenant decides to take me to court, the court will most likely favor the tenant

2. Find a new tenant - If the tenant does not agree with increased rent, find a new tenant (maybe a national franchise like Chipotle), with higher rent. OR, open a new business like a laundromat as this location is good for that. Again, this is possible only if I am allowed to ask the tenant to move out.

I would really appreciate any input on this. Thanks in advance!

[Michael K Gallagher]

If the tenants are currently there and performing I'd do whatever I could to keep them.  If you are raising the rent I'd make sure its cut and dry and is at the end of their lease term, I wouldn't trust that notarization tid bit you got from someone else, if the lease is signed and executed its likely valid through the full term.  If you are going to increase rent I find it best to do so where the new rent is still "under market" and it would still be more expensive for them to leave and move than to pay the increase and they still feel that they are getting a bargin.  

[Rajat Bhadauria]

Hi Michael,

Thanks for your response. 

Almost all the leases will end in 2030. Let's say I don't increase any rent until then, then what are my options to increase the valuation of the property? I am asking this because I want to add some equity to the property and refinance in a couple of years.

That's how I analyze a residential property. Maybe it works differently for a commercial property, and that's why I am here looking for guidance.

Really appreciate all the inputs!